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Unclassified information

The IMA’s unclassified sector has become the biggest sector in the onshore funds arena but its role as a dumping ground makes it difficult for advisers to access or assess funds located there. The original concept of the unclassified sector, which now houses 358 funds compared wit the all companies total of 330, was as a punishment for funds failing to meet their more traditional sector requirements.

But, these days, firms are choosing for their funds to be included in this mixed bag of a peer group as it provides managers with greater investment freedom.
Unlike the mainstream sectors, unclassified has no specific restrictions beyond those given to all mutual funds by the FSA.

Whether or not a fund specifically meets their sector guidelines has always been a struggle for the IMA. Just look at what happened with the UK equity income arena recently – one year a new sector is created for funds failing to meet the prescribed yield requirements. The next year, when yield was not so much an issue, the sector was ditched.

Over the years, the trade association has had the added difficulty of contending with the varied launch trends. At the turn of the century, there were dozens of tech funds in the specialist sector so the IMA created its own peer group. Yet since the tech bubble burst, the number of funds has subsequently shrunk to just 10. Similar situations have occurred over the years with regard to geographic regions such as Latin America, which no longer exists as its own sector. Today, the investment trend is China and the IMA has now created a new grouping for those portfolios.

Policing of the sectors has also become increasingly difficult as funds adopt the added powers allowed under Ucits III and as investors seek more outcome-oriented funds. From next year, the IMA may have additional help in this thankless task. At the moment, Lipper polices the sector but the IMA has tendered out this job, with submissions due at Christmas. The emphasis for potential providers of sector policing is to have an idea or strategy on how to monitor the use of derivatives, something that has become increasingly common even for portfolios outside the absolute return sector.

But another aspect of the IMA’s review will be to look at how to revise the sect-ors without their current asset guide-lines, categorising funds without set percentage restrictions such as how much should be in equities v bonds, as is the case in the managed sectors. Last week, the IMA made amend-ments to this effect with regards to its global growth sector definition, effective on January 1. The new “global” sector will house funds investing at least 80 per cent of their assets globally in equities, regardless of thematic or industrial focus. That means global specialist funds such as commodities or financials can opt to be included although companies may feel a financials mandate does not fit in a broad-based global sector, preferring to stay in specialist.

It is the choice between two ill-fitting options that has led many groups to opt for unclassified. Angus Duncan, sales director at investment consultants, says: “I doubt groups that are putting their funds into the sector by choice but rather they do not see another natural fit for the fund in question.”

There are obvious reasons why some funds are in unclassified, many are not available to retail clients, featuring high minimum investments. But, private client portfolios aside, there are other reasons funds are in unclassified.

Rathbones has a few of its retail multi-manager funds there, as manager David Coombs prefers the greater asset allocation freedom it gives him compared with the managed sectors.

He says: “We feel that peer group comparisons are irrelevant with this type of product – what is important is setting benchmarks not only for return but also for the acceptable level of risk taken.”

But because his portfolios are not listed in the managed sectors, advisers which want to compare cannot easily do so. If they could, they would see that the one-year return on Coombs’ multi-asset strategic growth fund would rank it 66 out of 161 in the balanced sector, 20 out of 171 in cautious and 92 out of 137 in active managed, stats from fund data analyst Financial Express show. At the same time, his one-year annual volatility score is lower than the average in either the balanced and active managed groups but higher than in cautious managed.

Among other retail options in unclassified are a myriad of bond funds, from index-linked to absolute return portfolios. Investec Target Return, which invests in a range of interest-bearing assets and related derivatives, is one such portfolio. It sits in the unclassified sector as it has not yet reviewed whether it should move to the absolute return category, which it too believes is disparate in terms of constituents.

Over three years to November 25, the fund has gained 17.57 per cent and the portfolio features an annualised volatility score of 4.93. When compared with all the IMA bond sectors, it ranks above average in returns against the sterling corporate and strategic peer groups but well below average in terms of volatility.

Compared with those in the AR sector, its gains are well above the average return of 8.73 per cent although its volatility is slightly above the AR peer group 4.10 average.

Where funds are found and against what peer group they should be compared creates issues for advisers. Whether or not it is as a result of difficulty with the IMA’s sector classification, Financial Express users show a significant preference to screen funds outside the trade association’s classification.

While the IMA is be applauded for contending with the hard work and constant criticism sector construction and monitoring dictates and for its planned changes, there is a still a question of whether or not such problems can ever be resolved.

As investment needs and demands ebb and change with the times, these issues will come up again and again. Whatever the answer or result that comes from the IMA’s review, what is certain is that greater clarity and the ability to choose a peer group with more relevance than the dumping ground of unclassified will be of great benefit to advisers and investors alike.


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